Effects on Consumption
- Created by: lyd_kate
- Created on: 30-01-17 15:30
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- Consumption Effects
- Interest Rates
- Rewards for sacrificing consumption
- Higher rate = more % of money earned
- High % leads to more saving
- Low % leads to more borrowing
- Level of Income
- Main determinator
- Keynesian theory of Consumption & Spending
- Income rises - less consumption as proportion of income
- Fraction saved increases
- Recession is caused by too much saving, not enough spending
- Absolute levels of income increase
- Expected future income
- People plan savings and consumption on how they expect their income to change over time
- Life Cycle Theory of Consumption
- Temporary fluctuations in year income have little impact on e.g. pensions
- Wealth
- Higher valued assets lead to an incentive to consume more
- More borrowing partially due to need to take out larger mortgages
- People can take out a larger mortgage and spend what they borrow - equity withdrawal
- Can also affect shares
- Consumer Confidence
- Optimism increase = less saving, more spending
- Governments wants this - try to enhance credibility of policies to achieve this
- Pessimism = vice versa
- Optimism increase = less saving, more spending
- Availability of Credit
- If credit is easy to obtain, consumption increases
- People supplement current income by borrowing on credit created by banking system.
- Credit crunch - there is a lack of funds in the credit market, difficult to obtain finance - increased cost
- If credit is easy to obtain, consumption increases
- Distribution of Income
- Rich people save greater proportion of income
- Rich to poor - increases consumption, reduces saving
- Rich people save greater proportion of income
- Expectations of future inflation
- Uncertainty caused by fears of rising inflation - precautionary saving & reduces consumption
- Could increase consumption to avoid future high prices
- Borrowing increase - house prices up faster than inflation
- Interest Rates
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